Leonard A. Feinberg, Inc. v. Central Asia Capital

• Decision Date: 01 May 1997
• Docket Number: Civil Action No. 95-8080.
• Citation: 974 F.Supp. 822
• Parties: LEONARD A. FEINBERG, INC. t/a Mr. Noah v. CENTRAL ASIA CAPITAL CORPORATION, LIMITED and Fashion Will, Limited.
• Court: U.S. District Court — Eastern District of Pennsylvania

Page 822

974 F.Supp. 822

LEONARD A. FEINBERG, INC. t/a Mr. Noah v. CENTRAL ASIA CAPITAL CORPORATION, LIMITED and Fashion Will, Limited.

Civil Action No. 95-8080.

United States District Court, E.D. Pennsylvania.

May 1, 1997.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Janet Stern Holcombe, Mann, Ungar, Spector, Labovitz, P.C., Judah I. Labovitz, Mann, Ungar, Spector, P.A., Philadelphia, PA, for Plaintiff.

Gary W. Fresen, Baker & McKenzie, Chicago, IL, Jeffrey B. First, Paul D. Keenan, Buchanan Ingersoll Professional Corp., Philadelphia, PA, for Defendant Central Asia Capital Corp., Ltd.

OPINION

PADOVA, District Judge.

                                                  Table of Contents
                  I.  Factual Background ..........................................................826
                 II.  Standard of Review ..........................................................828
                III.  Discussion...................................................................828
                      A.  Choice of Law ...........................................................828
                      B.  Letters of Credit .......................................................829
                          1. Generally ............................................................829
                          2. The Independence Principle ...........................................829
                      C.  Article 5 ...............................................................830
                          1. Scope of Article 5 ...................................................830
                          2. Definitions ..........................................................830
                             (a). Bank Classifications ............................................831
                             (b). Obligations Imposed .............................................833
                             (c). Central Asia's Classification ...................................833
                          3. Does Article 5 Apply? ................................................835
                             (a). Central Asia's Position .........................................835
                             (b). Feinberg's Position .............................................835
                             (c). Applicability Conclusion ........................................836
                      D.  Feinberg's Case .........................................................838
                      E.  Common Law Claims .......................................................841
                          1. Fraud ................................................................841
                          2. Conversion ...........................................................844
                          3. Civil Conspiracy .....................................................846
                

                         4. Tortious Inducement (Interference With Contractual Relations)..........846
                         5. Negligent Misrepresentation ...........................................846
                      F. RICO......................................................................847
                         1. RICO Analysis .........................................................849
                            (a). Predicate Acts....................................................849
                            (b). Continuity .......................................................849
                            (c). "Enterprise"......................................................850
                            (d). Injury ...........................................................850
                            (e). Fraud ............................................................850
                            (f). Conspiracy .......................................................850
                IV. Conclusion ....................................................................851
                

Plaintiff, Leonard A. Feinberg, Inc. ("Feinberg"), a Pennsylvania corporation, brings suit against two Hong Kong corporations, Central Asia Capital Corporation, Limited ("Central Asia") and Fashion Will, Limited ("Fashion Will").¹ Before the Court is Central Asia's Motion for Summary Judgment filed pursuant to Fed.R.Civ.P. 56(c). For the following reasons, the Court will grant in part and deny in part Central Asia's Motion.

The Court remarks preliminarily that it faces an issue of first impression: specifically, whether the customer of a letter of credit may maintain statutory and common law causes of action against a bank authorized by the issuing bank under a red clause to advance funds to the beneficiary of that letter of credit.

I. Factual Background

Feinberg imports and sells clothing in the United States, and Fashion Will supplies Feinberg with both raw materials and finished garments. In March, 1995, Feinberg contracted with Fashion Will to purchase 30,000 dozen cotton rompers.² Fashion Will requested that Feinberg obtain a letter of credit naming Fashion Will as the beneficiary. On March 28, 1995, Feinberg caused Meridian Bank ("Meridian"), located in Philadelphia, Pennsylvania, to issue a letter of credit ("Letter 1") in the amount of $1,000,000, naming Fashion Will as the beneficiary. (See Pl.'s Mem. Opp. Def.'s Mot. Summ. J. Ex. 9 ("Pl.'s Mem.")). Under the terms and conditions of Letter 1, after Fashion Will presented specific documents to Meridian indicating that Fashion Will was making a shipment of merchandise to Feinberg, Meridian would provide Fashion Will with the purchase price for the merchandise. Under Letter 1, Feinberg remained ultimately liable to Meridian.

On March 30, 1995, Fashion Will asked Feinberg to modify Letter 1 by adding a "red clause." Fashion Will told Feinberg that Fashion Will could not complete Feinberg's order without the red clause. The red clause provided:

UNDER "OTHER TERMS / INSTRUCTIONS," PLEASE INCLUDE `RED CLAUSE' TERMS: NEGOTIATIONS UNDER THIS LETTER OF CREDIT ARE RESTRICTED TO CENTRAL ASIA CAPITAL-CORP. LTD., HONG KONG. RED CLAUSE FACILITY: CENTRAL ASIA CAPITAL CORP. LTD. HONG KONG AUTHORIZED TO MAKE SIXTY PERCENT ADVANCES UNDER THIS LETTER OF CREDIT (SUCH ADVANCES REDUCE AVAILABLE BALANCE HEREUNDER) TO FASHION WILL LTD. ONLY (NOT TRANSFEREES) AVAILABLE BY FASHION WILL LET. SIGHT DRAFT ON CENTRAL ASIA CAPITAL CORP. LTD. HONG KONG FOR THE AMOUNT

OF THE ADVANCE AND FASHION WILL LTD. WRITTEN UNDERTAKING ADDRESSED TO LEONARD A. FEINBERG, INC. STATING `WE HEREBY ACKNOWLEDGE RECEIPT OF USD600000.00 REPRESENTING AN ADVANCE PAYMENT UNDER LETTER OF CREDIT NO. 00499573 ISSUED BY MERIDIAN BANK. WE HEREBY CERTIFY THAT THESE FUNDS WILL BE USED TO PURCHASE RAW MATERIAL OF FINISHED PRODUCTS TO ENABLE U.S. TO EFFECT SHIPMENTS OF LADIES WEARING APPAREL AND FURTHER UNDERTAKE TO DELIVER CONFORMING SHIPPING DOCUMENTS. AS PER THE LETTER OF CREDIT, TO AUTHORIZE CENTRAL ASIA CAPITAL CORP. LTD. HONG KONG OR BEFORE JULY 30, 1995 AND PROCEEDS SIXTY PERCENT OF EACH DRAWING PLUS INTEREST TO RETIRE THE PRINCIPAL AND INTEREST AMOUNTS DUE AND OWING TO THEM.'

REIMBURSEMENT INSTRUCTION: UPON RECEIPT OF CONFORMING DOCUMENTS WE MAKE ADVANCE PAYMENT AS INDICATED IN THE RED CLAUSE FACILITY ABOVE AND DEDUCT FROM THE PROCEEDS OF PAYMENTS MADE BY U.S. AND ALL AMOUNTS DUE TO YOU. IN THE EVENT SUCH DOCUMENTS ARE NOT PRESENTED TO YOU ON OR PRIOR TO JULY 30TH 1995 THEN YOU MUST SEND U.S. TESTED TELEX NOT LATER THAN THE SPECIFIED L/C EXPIRY DATE INDICATING THE SAME AND THE AMOUNT OF OUTSTANDING ADVANCES PLUS INTEREST DUE AND WE WILL REIMBURSE YOU IN ACCORDANCE WITH YOUR INSTRUCTIONS.

All other terms and conditions of the original credit instrument remain unchanged.

(Def.'s Mem. Supp. Mot. Summ. J. Ex. 1) ("Def.'s Mem.").³

On April 4, 1995, the red clause was added to Letter 1, allowing Central Asia to advance Fashion Will money needed to purchase raw materials to fill Feinberg's order without actually requiring Fashion Will to first present the specified documents to Meridian. (See Pl.'s Mem. Ex. 13). In the future, after Fashion Will shipped the merchandise to Feinberg, Central Asia was to present the specified shipping documents to Meridian — sight drafts and an undertaking by Fashion Will certifying that the advance was being used to purchase raw materials of finished products — in conjunction with Central Asia's request for reimbursement. Between April 6, 1995 and September 5, 1995, in accordance with Fashion Will's requests, Feinberg induced Meridian to modify Letter 1 to extend certain dates and increase the amount of credit. (See Pl.'s Mem. Exs. 17-18; Exs. 20-24; Ex. 28).

On April 10, 1995, Central Asia sent a telex to Meridian stating that it had advanced Fashion Will $600,000 pursuant to Letter 1's red clause. Central Asia attached the undertaking from Fashion Will. Central Asia repeatedly advised Meridian of its advances to Fashion Will via telex on July 21, 1995, July 25, 1995, September 11, 1995, and September 14, 1995. After Central Asia sent each telex to Meridian, it mailed letters confirming the telexes and enclosing the undertakings by Fashion Will to Meridian's office in Philadelphia. On September 1, 1995, Fashion Will told Feinberg that a typhoon in China had flooded its factory and damaged the merchandise, necessitating a new letter of credit. Feinberg then caused Meridian to issue a second letter of credit ("Letter 2") for $310,199.18, which also contained a red clause. (See Pl.'s Mem. Ex. 39).

On September 27, 1995, Fashion Will informed Feinberg that financial difficulties prevented it from filling Feinberg's orders. At this meeting, Fashion Will also admitted that it used the red clause advances to reduce its indebtedness to Central Asia. According to Fashion Will, the collateral securing its loans from Central Asia had decreased in value, and Central Asia pressured it to use the red clause advances to pay off the loan, instead of purchasing raw materials for Feinberg's order. On December 1, 1995, Central Asia made calls upon Meridian on Letter I and Letter 2.

II. Standard of Review

Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact...